Federal Judge Rules Crypto Echange Binance Must Face Bulk of SEC Lawsuit
On Friday, June 28, 2024, Amy Berman Jackson, senior United States district judge of the United States District Court for the District of Columbia, ruled that crypto exchange Binance and its entities will have to face the majority of a lawsuit brought by the U.S. Securities and Exchange Commission (SEC).
In an 89-page order, Judge Jackson found that the SEC had sufficiently shown that most products and transactions conducted by Binance met the characteristics of an investment contract as outlined in the Howey test, the precedent used to determine if something is a security. Specifically, Binance will have to face allegations that its initial coin offering and sales of its BNB token were unregistered securities offerings.
The SEC argues that Binance promoted BNB by telling buyers the funds would be used to develop a strong exchange platform, directly linking the token’s value to the company’s success. However, Judge Jackson ruled that secondary sales of BNB tokens by third parties likely did not create investment contracts since downstream buyers could not have directly invested in Binance’s efforts when purchasing from others.
While the SEC won on most claims, the judge disagreed that Binance’s BUSD stablecoin and a lending program called “Simple Earn” met the standards of an investment contract. For BUSD, the SEC did not show how buyers expected to realize profits from holding a token intended to maintain a $1 value. And for Simple Earn, loaning crypto for a fixed interest return did not seem to imply profits from Binance’s efforts.
However, the SEC adequately demonstrated that Binance’s BNB Vault lending program and Binance.US’s staking program could be considered investment contracts since investor funds were pooled and controlled by the exchanges with returns tied to their validation work.
As most asset and product sales plausibly created securities, Judge Jackson ruled the SEC had shown Binance and Binance.US failed to register as required. The order also allowed claims that Binance.US may have defrauded users by permitting wash trading to proceed.
Former Binance CEO Changpeng Zhao remains implicated as the complaint provided evidence he effectively operated BAM Trading. Zhao is currently serving jail time as part of a broader settlement with regulators over money laundering and sanctions violations.
Crypto advocates still celebrated the decision on secondary sales, aligning with a prior ruling in the SEC’s case against Ripple. The order was also seen as a rebuke of the SEC’s broad regulatory overreach into the crypto space through enforcement actions. Binance argued the ruling calls for consistent rules rather than prohibiting industry growth.
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